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    HARNESSING NATURE'S POWER

    Deploying and Financing On-SiteRenewable Energy

    TIMOTHY C. HASSETT

    WITH

    KARIN L. BORGERSON

    W R I R E P O R T

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    Harnessing Natures PowerDeploying and Financing

    On-Site Renewable Energy

    BY

    TIMOTHY C. HASSETT

    WITH

    KARIN L. BORGERSON

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    HYACINTH BILLINGS

    Publications Director

    TIMOTHYC. HASSETT

    Author

    KARIN L. BORGERSON

    Contributor

    MAGGIE POWELL

    Layout

    Each World Resources Institute report represents a timely, scholarly treatment of a subject of public

    WRI takes responsibility for choosing the study topics and guaranteeing its authors and researchers

    It also solicits and responds to the guidance of advisory panels and expert reviewers. Unless otherw

    GENERAL DISCLAIMER

    This publication has been prepared to acquaint its reader with the various features and benefits ofas well as financing options and incentives available for deploying renewable energy on-site. It is n

    definitive planning guide for undertaking a renewable energy project. Information contained her

    be correct at the time of its publication, but neither the author, WRI, nor any of its staff, partners

    assumes any legal responsibility for accuracy, completeness, or usefulness of information contained

    reference to any commercial product or service implies an endorsement.

    Prior to undertaking any renewable energy project, competent professional expertise is required

    renewable resource and design an appropriate renewable energy system, (2) understand the compl

    accounting, and tax implications involved, and (3) ascertain whether any federal, state, or local inc

    applicable.Under no circumstances shall the author, WRI, or any of its staff, partners, or collaborators be h

    damages including incidental, special, or consequential damages arising from use of this publicatio

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    Table of Contents

    ACKNOWLEDGMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv

    FOREWORD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v

    EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

    Section I INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

    Section II THE BENEFITS OF RENEWABLE ENERGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

    Section III ASSESSING A SITES RENEWABLE ENERGY RESOURCE POTENTIAL . . . . . . . . . . . . . . . . 11

    Section IV INCENTIVES SUPPORTING RENEWABLE ENERGY DEPLOYMENT . . . . . . . . . . . . . . . . . . 15

    Section V OPTIONS FOR DEPLOYING ON-SITE RENEWABLE ENERGY . . . . . . . . . . . . . . . . . . . . . 20

    Section VI OBJECTIVES AND RISKS IN ON-SITE RENEWABLE ENERGY DEPLOYMENT . . . . . . . . . . . . . 30

    Section VII CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

    REFERENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

    GLOSSARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

    ABOUT THE AUTHORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

    ABOUT WRI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

    TABLES

    1. On-Site Renewable Energy Deployment andFinancing Options

    2. Federal Incentives for Renewable Energy(Partial Listing)

    3. Comparison of Tax Credit and Tax Deduction

    4. California Solar Initiative EPBB and PBIAmounts per Step

    5. Options for Deploying On-Site RenewableEnergy

    6. Partial Results from The Future of FinancingAlternative Energy Equipment

    7. Treatment of Net Excess Electricity Genera-tion for Selected States

    FIGURES

    1. Deploying On-Site Renewable Energy

    2. Comparison of Renewable Energy Costs andthe 2008 Average U.S. Commercial ElectricityPrice

    3. EIA Energy Prices, 1980-2030 ($ 2006 permillion Btu)

    4. United States Wind Resource Map

    5. United States Solar Radiation Map

    6. States Employing Net Metering Regulations

    7. Solar Power Purchase Agreements

    BOXES

    1. WRIs Renewable Energy anWork

    2. Understanding the Cost of

    3. Google Uses Sunshine to Cua Shadow Price for Carbon

    4. To Make Claims about UsinNot Sell the Renewable Ene(RECs)

    5. Innovests Carbon Beta SCarbon Matters

    6. Ski Resort Makes Snow whe

    7. BP Transforms Brownfield i

    8 Canadian Hotel Saves Mon

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    Acknowledgments

    Many people have contributed their thoughts and ideas to bringing this publication to fruition. Rev

    generously gave of their time, providing new perspectives and valuable insights, include Clay Rigdon

    and Ryan Levinson. The authors also wish to recognize Jennifer Layke, Alex Perera, Samantha Putt

    Ranganathan of WRI for their comments on early drafts and continued support throughout the pr

    David Malakoff, Polly Ghazi, and Stephanie Hanson provided skillful editing and we thank Jenni

    Billings, and Maggie Powell for invaluable assistance with process, production, and design.

    The authors would also like to give special thanks to WRIs corporate partners as well as to the fo

    for their steadfast support of WRIs climate and business engagement work: Energy Foundation, Ri

    Goldman Foundation, Oak Foundation, Robertson Foundation, Emily Hall Tremaine Foundation

    UK Global Opportunities Fund, and the WestWind Foundation.

    Timothy C. Hassett

    Karin L. Borgerson

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    Foreword

    For decades businesses and consumers purchased and consumed energy with little regard to the environme

    or impact of that consumption. Today, against the backdrop of a warming climate and increasing energy sec

    concerns, that outlook is changing.

    Businesses of every size and type are aware that our energy system must be modernized and diversified so

    end our dependence on high-carbon energy sources. Around the country, the legacy of passive energy consu

    is being replaced with smarter, proactive energy management that focuses both on cost and performance. T

    definition of performance is now becoming multifacetedreliability, security, and environmental performan

    emerging as issues for energy, environmental, and financial managers alike.

    The policies adopted and investments made by the U.S. Congress and Administration over the next sever

    will shape the countrys infrastructure for decades to come. New markets for renewable energy, emerging un

    leadership, are already available, and energy prices are expected soon to incorporate the costs of emitting gr

    gases. Forward-thinking business managers are taking advantage of these opportunities to bring clean techn

    scale and take a lead in renewable energy deployment.

    This report is based on a decade of experience that the World Resources Institute (WRI) has gained by w

    with major U.S. energy consumers as they explore strategies and opportunities to diversify their energy port

    achieve sustainable competitive advantage. It offers strategies and approaches that can be valuable to a wide

    firms looking at potential investments, contracts, and facility operational decisions regarding use of renewa

    It provides guidance on how to consider the choice to finance or purchase renewable technologies for use o

    facilities and advice on where to go for further information.

    WRIs Green Power Market Development Group was founded with a ten-year goal of helping some of the

    energy consumers in the U.S. purchase and support 1,000 megawatts of clean, renewable energyenough p

    displace a large coal-fired power plant. The Group sought to bring new products and purchasing approache

    the market in order to support energy and environmental stewardship efforts. We are very pleased to repor

    Green Power Market Development Group companies and WRI have met that goal, and these companies le

    leadership has been replicated by many other firms.

    We hope this report will inspire and assist you to craft and implement strategies to support renewable ene

    facilities, and that you will share your lessons and stories with us. Transforming our energy system is a journ

    require continued new learning and policy innovation. We thank you for joining us in this journey.

    JONATHAN LASH

    President

    World Resources Institute

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    In recent years, many U.S. corporations have deployed

    renewable energy systems at their headquarters,

    industrial facilities, and retail stores. These include large

    corporationssuch as Google, Johnson & Johnson,

    Macys, Staples, and Wal-Martand smaller firms, such as

    dairy farms, hotels, restaurants, wineries, and a ski resort.

    Many companies, however, have yet to take advantage of

    the incentives available for investing in on-site renewable

    energy and the opportunities such investment brings. The

    purpose of this report is to provide a detailed introduction

    for such businesses on deployment and financing options

    for renewable energy systems, as well as on the risks and

    benefits involved. In so doing, our aim is to promote the

    scaling up of renewable energies as part of a transition by

    the United States to a low-carbon, high-energy-efficiency

    DEPLOYING RENEWABLE ENERGY:

    THE BENEFITS

    Certain renewable energy technologiessuch

    wind power, solar thermal water heating, and

    heat pumpsare already economically compe

    traditional sources of energy, such as fossil fu

    when the cost of power produced by renewab

    than average utility rates, many companies camoney by using renewables to institute peak

    In peak shaving, companies produce renewab

    during periods of peak power use, when utili

    charge higher rates. In addition, government

    can significantly reduce the actual cost of ren

    systems. These incentives include federal, sta

    Executive Summary

    iStockphoto.com/CelesteQuest

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    Improving energy reliability at a companys location

    (depending on system configuration).

    Helping companies to be environmentally responsibleand enhance their reputation through a reduction

    in greenhouse gas (GHG) emissions or a visible

    commitment to renewable energy.

    AT A GLANCE: DEPLOYMENT AND

    FINANCING OPTIONS

    When considering on-site renewable energy deployment,

    it is important to measure the quality of a specific sites

    renewable energy resource (such as wind or sun). If a site is

    acceptable, there are numerous options for deploying and

    financing a renewable energy system (compared below). In

    many of these options, a company will own the generation

    assets deployed at its site, but a company can still benefit

    even if it does not own the assets.

    One fairly standard option is the Direct Ownership

    of Power (Use of Power). In this scenario, a company

    purchases or leases a renewable energy asset for on-site

    deployment and uses the power itself and, in many cases,

    sells some excess power to the grid.

    A far less common option is Direct Ownership of Power

    (No Power Use). In this scenario, a company does not

    use most of the power generated by the system installed

    at its site, but rather uses the system primarily to sell

    power to the grid. This scenario is not yet common due

    to a number of factors, including disincentives created

    by government regulation (such as limitations on the size

    of systems that qualify for a billing pr

    metering). This deployment model c

    if governments adopt feed-in tariffs,

    guaranteed minimum electricity tariff

    Companies seeking to limit their in

    commitment, or earn a return on a p

    utilized asset (such as a rooftop), can c

    Ownership of Power. In this scenario

    renewable energy assets at a company

    a. sells the power to the site host und

    purchase agreement (Use of Power

    b. leases the space and sells the powePower Use).

    IDENTIFYING AND DEPLOYIN

    RENEWABLE ENERGY OPTION

    To assist companies in making inform

    have defined objectives and risks com

    with on-site renewable energy deploymschematic of the basic stages involved

    In order to choose the best deploym

    option, a company must define its ob

    understand risk trade-offs. Objectives

    Reducing Energy Costs: Either re

    costs or creating a hedge against po

    increases.

    Improving Energy Reliability: Alt

    renewable technologies cannot pro

    TABLE 1 . ON-SITE RENEWABLE ENERGY DEPLOYM ENT AND FINANCING OPT IONS

    DIRECT OWNERSHIP OF POWER THIRD-PARTY OWNERSH

    Use of Power Company invests in an on-site renewable energy project andconsumes the power

    Investor installs renewable assets atcompany purchases power under lon

    Financing Options General corporate financing or dedicated financing:Secured lendingLeasing1

    Vendor financingESCO2 with Energy Savings Performance Contract

    Solar Power Purchase Agreement (PPESCO with Power Purchase Agreemen

    No Power Use Company invests in an on-site renewable energy project andsells all or most of the power

    Investor installs renewable assets atexchange for lease payments or othe

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    power for mission critical needs, an on-site deployment

    can improve energy reliability if it includes energy

    storage (such as a battery).

    Enhancing Brand/Reputation: Through a visible

    commitment to renewable energy and/or a reduction

    in greenhouse gas emissions.

    Using Tax Appetite: If a company has sufficient

    taxable income, it can benefit by taking advantage of

    tax-based incentives for deploying renewable energy.

    Risks associated with deploying on-site renewable energy

    can include:

    Dispatch Risk: Power is not generated by an on-site

    deployment for any reason.

    Operational Risk: The system does not perform as

    anticipated. This risk is typically assumed by the entity

    responsible for operating and maintaining the system.

    Technology Risk: Technological improvem

    an opportunity cost for someone that has

    invested in the older technology.

    Transfer Risk: Renewable energy assets m

    redeployed when a company moves or cha

    locations.

    Credit Metrics: A renewable energy invest

    affect the financial ratios that analysts use

    company.

    Successfully defining objectives and unders

    risks can help a company make the best decisdeploying renewable energy systems. The bas

    considering an on-site renewable energy depl

    shown schematically in Figure 1.

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    Introduction

    initial capital cost or a low perceived

    may have difficulty determining the o

    solution, lack familiarity with renewab

    be concerned about having sufficient

    maintain and manage a renewable en

    While such concerns are understan

    to know that numerous incentives an

    options have evolved to address these

    state governments offer a myriad of in

    reduce capital commitments or boost

    Third-party ownership or hosting mo

    without an appetite for tax credits or

    SEC

    TI

    O

    N

    I

    Many companies in the United States are already

    experiencing the benefits of deploying renewable energy

    technologies at their business sites. These include large

    corporationssuch as Google, Johnson & Johnson,

    Macys, Staples, and Wal-Martand smaller firms, such as

    dairy farms, hotels, restaurants, wineries, and a ski resort.

    Corporations have even deployed renewable energy at

    brownfield sites.1

    These investments have helped companies reduce

    energy costs or create a hedge against possible future price

    increases. They have also helped companies generate a

    return on an underutilized asset, such as a rooftop, and

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    The World Resources Institute has been engaging theand low-carbon technology deployment for several yeaour projects to achieve two primary goals: (1) accelerrenewable energy, and (2) build a business constitueon climate and energy policy. Our business network iscorporations that we engage through the Green Power(GPMDG), along with its California and European affilBusiness Group, with regional workgroups in the NortOur current projects have generated significant outco

    including: GPMDG partners have procured over 850 MW of ne

    energy.

    GPMDG partnerships have helped create new finanprograms, and encourage policy incentives to promand energy efficiency in the United States and Euro

    GPMDG partners have become leaders in supportinMotors is one of the nations biggest corporate useGoogle has made important investments in geothetechnologies, and several GPMDG members make tsolar photovoltaics.

    10 Climate Midwest partners are actively participachange policy initiatives.

    U.S. Climate Action Partnership, which WRI helpedfor Legislative Actionwith cap-and-trade design recap.org for more information.)

    Source: World Resources Institute.

    BOX 1 . WRI S RENEWABLE ENERGY AND CLThis publication is designed to help companies explore

    the various options for deploying and financing renewable

    energy technologies. In particular, it considers deployment

    strategies for solar photovoltaic, solar thermal, wind,and geothermal heat pump technologies and provides

    examples of successful deployments. It provides a

    unique approach to considering each option, along with

    information about their relative features and benefits. In

    addition, it identifies and analyzes numerous risks, so that

    companies can make informed decisions.

    Notes1. U.S. Congress 2002. Public Law 107118 (H.R. 2869), Small

    Business Liability Relief and Brownfields RevitalizationAct, defines brownfields as real property, the expansion,

    redevelopment, or reuse of which may be complicated by

    the presence or potential presence of a hazardous substance,

    pollutant, or contaminant.

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    SEC

    TI

    O

    N

    II

    The Benefits of Renewa

    Energy

    Many companies have already discovered the benefits of

    deploying renewable energy at their business locations.

    These benefits can include:

    Reducing Energy Cost: Certain renewable energy

    technologies are already competitive with traditional

    sources of power and can offer immediate cost savings.Most renewable energy technologies provide a hedge

    against possible future price increases or volatility.

    Improving Energy Reliability: In certain cases, on-

    site renewable technologies may help provide back-up

    power when there are problems with getting power

    f h l d d f bl

    Brand Enhancement: Investing in

    can be an important factor in appe

    market that is becoming increasing

    conscious.

    Before discussing how to deploy ren

    technologies, we will consider each ofdetail.

    ENERGY COST

    There is currently a wide disparity in

    of renewable energy technologies. Dir

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    comparison shows that several renewable app

    compare favorably, including solar hot water,

    and geothermal heat pump.

    This analysis, however, may understate the advantages of deploying on-site renewable en

    is because it uses the average retail price for e

    paid by commercial users. This is problematic

    reasons: (1) there are significant differences in

    electricity rates between states, and (2) many

    charge commercial users more for power duri

    periods. As a result, renewable energy applica

    provide a good peak-shaving profile (meaning

    generate electricity when time of use priceshighest) may offer significant savings. Solar p

    installations are a good example of a system t

    shaving potential, since the sun typically shin

    on hot days, when demand for power peaks d

    conditioning needs.

    When evaluating renewable energy applicat

    financial costnot the economic costshould

    investment decisions. In part, this is because

    cost accounts for government incentives at thstate, and local levels that can reduce the cost

    energy investments. Such incentives can have

    impact on the financial return of a renewable

    project.

    In California, for example, a qualifying sola

    photovoltaic system would benefit from both

    federal investment tax credit and the incentiv

    under the California Solar Initiative.2 The Ca

    incentive initially provided a lump sum paym

    $2.50 per kilowatt for systems of less than 50

    The cost of renewable energy generation can be considered in twoways: (1) economic cost, and (2) financial cost.

    Economic Cost

    Economic cost is the cost of generating power from the underlyingrenewable energy asset and is a function of the:

    Quality of the available renewable energy resource: For a givenrenewable energy asset, such as a wind turbine or photovoltaiccell, more power will be generated with a better quality renewable

    resource. However, better quality does not necessarily just meanstronger. For example, at very high wind speeds, many windturbines are designed to cut out so as to avoid excessive wear.

    Procurement price: The cost of the renewable energy system hasa direct impact on the cost of generating renewable power. Fora given renewable energy system and renewable resource, lowerprocurement prices lead to lower power generation costs.

    Operating and maintenance expenses: These are the ongoingcosts of operating and maintaining the renewable energy system.

    Financial Cost

    Financial cost is the actual cost to the company of its renewableenergy and is the economic cost adjusted for the impact of:

    Interest expense: Although renewable energy systems generally donot require fuel, they can be capital-intensive. As such, the capitalcharges needed to finance the asset can be a large component ofpower generation costs.

    Federal, state, and local incentives: Such financial incentives canreduce the cost of acquiring, financing, or operating a renewableenergy system.

    BOX 2 . UNDERSTANDING THE COST OF RENEWABLE

    ENERGY

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    IV provides a general overview of a broad array of suchincentive programs.

    Even when there is no immediate cost advantage to

    deploying renewable energy, most renewable projects may

    act as a hedge against possible future increases in energy

    prices. Renewable applications such as wind power, solar

    photovoltaic, solar thermal water heat, and geothermal

    heat pumps use no fuel. Consequently, they serve as a

    natural hedge against potential rising fossil fuel costs.

    Predicting future prices for any commodity is difficultand energy is no exception. Figure 3 charts recent

    historical and projected energy prices from the Energy

    Information Administration (EIA). It clearly highlights the

    increase in the real dollar cost of energy that began in the

    early part of this decade.

    While the EIA is projecting relatively constant real dollar

    energy costs through 2030, there are two important points

    to consider:

    Inflation: The prices shown in Figure 3 are in constant2006 dollars. They do not include the potential impact

    of inflation, which could increase costs. Deployment of

    many renewable energy technologies, such as wind and

    solar, provides a hedge against inflationary increases in

    fuel costs since they do not require any fuel use.

    9.75 and 14.52 cents/kWh in 203

    the increase would have depended

    availability of electricity generated

    technologies and access to interna

    estimates are national averages; act

    would vary by region.

    ENERGY RELIABILITY

    Distributed energy systems can provid

    up power in case of interruptions in e

    by the transmission grid. Some busin

    data centers, resort hotels, food proce

    manufacturerscan experience signifi

    blackouts. To prevent such losses, the

    for years maintained conventional ba

    (powered by fossil fuels).

    To improve energy resiliency, these c

    also incorporate certain types of on-si

    energy systems. These systems must in

    storage (i.e., batteries or other storage

    as appropriate auxiliary equipment, in

    uninterrupted power in the event of a

    forms of renewable energy are interm

    are only available when the sun is shi

    blowing. When paired with an energy

    as batteries, these systems can provide

    back-up power on a scale that matche

    generation system and batteries. Any

    Google recently installed 1.6 MW of solar photMountain View corporate campus. The installfacilitys peak energy needs and has an estimjust 7.5 years.

    In addition, Google has indicated that it will iprice for carbon into its power cost estimatefor new data centers. According to a companycarbon is an important tool to reducing the fienergy investments face. Moreover, when eva

    using a shadow price for carbon puts renewalevel playing field.

    Source: Google 2008.

    BOX 3 . GOOGLE USES SUNSHINE TO

    PILOTS A SHADOW PRICE FO

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    capacity of the on-site system. This risk would be most

    acute if the grid interruption coincided with temporarily

    poor renewable resource conditions at a site.

    GREENHOUSE GAS REDUCTIONS

    Deploying renewable energy on-site allows a company

    to reduce its greenhouse gas emissions from either its

    direct (Scope 1) or indirect (Scope 2) emissions6, under

    accounting and reporting standards established by the

    international Greenhouse Gas Protocol Initiative (co-

    convened by WRI and the World Business Council for

    Sustainable Development):

    Scope 1: Direct GHG emissions include emissions that

    occur from sources that are owned or controlled by

    the company, for example, emissions from combustion

    in owned or controlled boilers, furnaces, vehicles, etc.7

    Scope 2: Electricity indirect GHG emissions account

    for GHG emissions from the generation of purchased

    electricity consumed by the company. Purchased

    electricity is defined as electricity that is purchased orotherwise brought into the company.8

    Solar water heating and geothermal heat pump

    applications, for instance, can reduce emissions from

    energy required for heating water or facilities. This serves

    to reduce either Scope 1 or Scope 2 emissions depending

    on the energy (direct combustion or purchased electricity)

    that would have been used to meet these needs. On-

    site solar photovoltaic and wind electric generation can

    also reduce indirect (Scope 2) emissions by reducing the

    amount of power purchased from the grid.

    BRAND ENHANCEMENT

    By deploying on-site renewable energy, a company can

    enhance its image with customers, investors, and other

    stakeholders in several ways. First, the company can

    reduce its contribution to climate change, an increasingly

    widespread concern. Second, it can make a highly visible

    commitment to producing green energy by investing in

    high-profile technologies such as wind turbines.

    Managing a companys greenhouse gas emissions is

    critical since a variety of stakeholdersfrom consumers

    and investors to policymakers and regulatorsare

    Deploying renewable energy can also have a

    impact on corporate image if the system is hi

    Wind towers or solar photovoltaic systems, fo

    are more visible to the public than geotherma

    pumps. Companies seeking to maximize the vtheir renewable energy investments may want

    which system would best fit their needs. For e

    the visibility of a renewable installation migh

    important for commercial locations with sign

    retail traffic or for manufacturing plants and

    centers near main transportation thoroughfa

    Deploying on-site renewable energy offers m

    benefits, and as Innovests recent study showmake a difference. (See Box 5.)

    Renewable energy certificates (RECs) are tradable instindicate the generation of one megawatt hour of electrrenewable source. According to a recent WRI fact sheetthat install and own on-site renewable power systems the use of green power from their projects. However, cothat choose to sell the RECs from their system to improeconomics give up the right to claim they are buying thfrom the system, even though it is located at their faci

    Note

    1. Aga and Lau 2008.

    2. The FTC is currently reviewing the Guides for Use of ReneClaims, or Green Guides, and has sponsored a series of wwhich (January 8, 2008) focused on carbon offsets and recertificates.

    BOX 4 . TO MAKE CLAIMS ABOUT USING GREEN P

    NOT SELL THE RENEWABLE ENERGY CERTIF

    A 2007 study by Innovest Strategic Value Advisers coinvestment returns of top carbon performers and calaggards. Innovest rated a companys carbon perform

    its Carbon Beta, which analyzes four factors:

    Companies overall carbon footprint or potentialrisadjusted to reflect differing regulatory circumstancecountries and regions

    Their ability to manageand reduce that risk exposur

    Their ability to recognize and seize climate-driven o

    BOX 5 . INNOVEST S CARBON BETA SHOWS

    CARBON M ATTERS

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    Notes1. EIA 2008a.

    2. CPUC 2008a.

    3. For systems larger than 50kW the California Solar Initiativeprovides performance based incentives over a 5-year period ofup to $0.39/kWh for residential and commercial customers and

    $0.50/kWh for non-taxable entities. Please note that all incentive

    amounts (per kW and kWh) reduce as a function of the quantity

    of solar energy installed. Please refer to the appropriate CPUCProgram Administrators for current information on incentive

    levels.

    4. EIA 2008b.

    5. Solar Ray n.d. Virtually all grid-connecte

    systems that do not have battery backup

    automatically shut down in the event of to protect utility workers. If a site installsrenewable energy system that does not in

    system will not provide backup power du

    6. The Protocol also covers a Scope 3 categ

    indirect GHG emissions). These are defiof the activity of the company, but occur

    or controlled by the company. As such,

    energy deployment would not have an imScope 3 greenhouse gas footprint.

    7. WRI and WBCSD 2004.

    8. Ibid.

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    Assessing a Sites Renewa

    Energy Resource Potentia

    While on-site renewable energy projects may provide

    numerous benefits, not all technologies are appropriate in

    all circumstances. This section provides a brief introduction

    to assessing a sites potential for four basic renewable

    energy technologies: geothermal heat pump, wind,

    solar photovoltaic, and solar thermal water heat. Before

    embarking on any renewable energy project, however,companies should seek competent professional advice.

    GEOTHERMAL ENERGYGeothermal energy systems take advantage of temperatures

    beneath the earths surface to provide energy There are

    geothermal resources exist throughout the

    U.S., and there is tremendous potential for

    use applications. A recent survey of 10 west

    identified more than 9000 thermal wells an

    more than 900 low- to moderate-temperatu

    resource areas, and hundreds of direct-use

    Geothermal Heat Pumps (GHPs): Using

    just some six feet below ground surface th

    relatively constant throughout the year to

    heating in winter and cooling in summer.

    they require electricity to operate, GHPs

    50% less electricity than conventional hea

    iStockphoto.com/eliandric

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    WIND

    Wind energy systems generate electricity by using turbines

    to capture the winds energy. Many locations in the UnitedStates have good wind resources (see Figure 4). Evaluating

    the quality of the wind resource at a specific site is

    critical to determining if it is suitable. Before making

    any investment decision, companies should commission

    a professional wind study, which evaluates the quality

    and consistency of a sites wind resource potential. This

    Jiminy Peak Mountain Resort, in Massachusetwind turbine on its property in response to coenergy costs. One of the key attractions to usthe resorts wind resource is best during winteenergy requirements are highest due to snowoperations. The resort used a grant and a 10-the project, which has an estimated payback

    BOX 6 . SKI RESORT MAKES SNOW WHE

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    SOLAR PHOTOVOLTAIC

    Solar photovoltaic systems generate electricity using

    technologies that capture the energy in sunlight. Many

    parts of the United Statesespecially the Southwesthave

    abundant solar resources (see Figure 5, which shows

    estimates of the average daily total radiation for flat plate

    solar collectors). Before investing, however, firms should

    commission a thorough professional study of a specific

    sites solar resources. Even if it reveals lower or moderate

    In 2002 BP completed the installation of one of the largfacilities on the East Coast, used exclusively for remedIt has some 276 kW in capacity. It is on a gypsum landto BPs 130-acre Paulsboro site, which had served as aand storage facility for petroleum and specialty chemicremediating the Paulsboro site to return it to productivinstallation is providing approximately 20-25% of the f th d t t t t l t d il t

    BOX 7 . BP TRANSFORMS BROWNFIELD INTO B

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    SOLAR WATER HEATING

    Solar thermal water heating systems do not generate

    electricity. Instead, they use the suns heat to provide hotwater for residential and commercial applications. Solar

    water heating is not restricted to warm, sunny climates. In

    fact, solar water heating systems can be used effectively

    throughout the Unites States at residences and facilities

    that have an appropriate near-south facing roof or nearby

    unshaded grounds for installation of a collector.4

    There are several types of solar water heating systems:5

    Active or Passive: Refers to whether electricity isrequired to power pumps (active) or whether natural

    convection circulates water (passive).

    Direct or Indirect: Refers to whether water is heated

    directly by the sun or whether it is heated indirectly by

    a heat transfer fluid.

    In addition to having an appropriate installation surface,

    the most cost-effective sites for this technology typically

    have generally constant demand for hot water and

    relatively high energy prices.6Determining whether a solar water heating system can

    generate cost savings for a business requires assessing:

    whether there is an appropriate physical installation site

    the pattern of hot water consumption

    the current cost of water heating

    zoning restrictions or permitting requirements

    whether any incentives are available

    If a solar heating system appears to

    companies should engage a competen

    make a site assessment and suggest a s

    that is appropriate to their needs and

    Notes1. U.S. DOE 2008c.

    2. U.S. DOE 2008a.

    3. U.S. DOE 2008b.

    4. Walker 2008.

    5. Ibid.

    6. Ibid.

    Solar thermal systems can be advantageous requires a significant amount of hot water onincluding hotels, restaurants, agriculture, anFor instance, the Confederation Place Hotel inCanada, benefits from two solar water heatinyear-round hot water to guest rooms, laundrykitchen. The delivered cost is equivalent to 3.the system has an expected payback of 4 yeaoperating results. Freeze protection allows for

    Source: EnerWorks 2007.

    BOX 8 . CANADIAN HOTEL SAVES M ON

    ROUND SOLAR HOT WATER

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    Incentives Supporting

    Renewable Energy Deploy

    Federal, state, and local governments offer a significant

    array of incentives for deploying renewable energy

    systems. This section does not exhaustively detail these

    incentives. Rather, it illustrates various types and presents

    pertinent examples. One of the easiest ways to research

    incentives in specific locations is to visit the Database of

    State Incentives for Renewables and Efficiency, known asDSIRE, (http://www.dsireusa.org/), which is maintained

    by North Carolina Solar Center and the Interstate

    Renewable Energy Council. The database includes

    federal and state incentives as well as local and utility -

    specific programs. It was used in preparing the following

    FEDERAL INCENTIVES

    The federal government offers numerous ince

    business deploy renewable energy. For illustrat

    these incentives can be grouped as described in

    TABLE 2 . FEDERAL INCENT IVES FOR RENEW(Partial Listing)

    Corporate Deduction Energy Efficient Commercial

    Corporate Depreciation Modified Accelerated Cost Re

    Corporate Exemption Residential Energy Conservat

    Corporate Tax Credits Business Energy Tax Credit

    Disclaimer: WRI is not a tax specialist and does not provide tax advice. The information presented in this section is designed to acquaint the reader with various forms of innot be construed as a definitive source for tax-related information. Prior to making any investment decision, companies should seek competent tax advice.

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    Some of the most important federal incentives are based

    on tax credits and tax deductions. A tax credit is an actual

    reduction of tax liability; a tax deduction reduces taxable

    income. The difference can be seen in Table 3, whichcompares a $5 million credit to a $5 million deduction.

    Federal Tax CreditsThe federal government offers two types of tax credits:

    Investment Tax Credit (Business Energy Tax Credit);

    and

    Production Tax Credit (Renewable Energy Production

    Tax Credit).

    In general, a renewable technology qualifies for either

    the investment or the production credit, and no project

    is eligible for both. It should be noted that the Energy

    Improvement and Extension Act of 2008 expanded thenumber of qualifying technologies for both programs

    However, since these and other incentive details are

    beyond the scope of this paper, it is important to engage

    competent tax and legal advisers to understand the

    specific requirements for each program.

    The Investment Tax Credit (ITC) is based on the

    capital cost of the equipment and taken in the year in

    which the capital equipment is operational.2 It is set at

    30% for commercial investment in certain renewableenergy applications such as solar technologies, fuel cells,

    and small commercial wind. A 10% ITC is available for

    technologies such as geothermal heat pumps, combined

    heat and power, and microturbines.3

    The Production Tax Credit (PTC) is based on the actual

    output of the project is earned on a kilowatt hour basis

    Modified Accelerated Cost Re

    (MACRS)

    The key tax deduction offered by the is the Modified Accelerated Cost Rec

    (MACRS), which provides for a five-y

    depreciation classification for many re

    assets. In addition, in 2008 there was

    which under certain circumstances al

    a qualified renewable assets tax basis

    in 20085. However, there are numero

    example, if the asset qualifies under th

    Tax Credit discussed above, the tax baby 50% of the credit.6

    STATE INCENTIVES

    There are several types of state incent

    State Corporate Tax Incentives

    Sales Tax Exemptions

    Property Tax Exemptions Rebates and Grants

    Loans

    Production Incentives

    These incentives are considered bel

    an exhaustive survey. Note that each p

    to change and has numerous restricti

    elements that are too detailed to cove

    State Corporate Tax IncentiveSimilar to federal tax incentives, state

    include credits and deductions. For ex

    Florida offers a renewable energy p

    credit of $.01 per kWh for certain

    technologies for additional electric

    between July 1, 2007 and June 30,

    are limited to $5 million per fiscalpro-rated among program particip

    attained.7

    Texas provides a solar and wind en

    tax deduction allowing two option

    investing in solar and wind devices

    TABLE 3 . COM PARISON OF TAX CREDIT AND TAX

    DEDUCT ION

    TAX CREDIT TAX DEDUCTION

    Taxable income $50,000,000 $50,000,000

    Tax deduction of $5,000,000-5,000,000

    Taxable income after deduction 50,000,000 45,000,000

    Tax liability at 35% 17,500,000 15,750,000

    Tax credit of $5,000,000 -5,000,000

    Tax paid $12,500,000 $15,750,000

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    Sales Tax ExemptionsSales tax exemptions allow companies to purchase certain

    renewable energy equipment without paying sales tax.

    Examples include:

    Washington State offers a sales and use tax exemption

    for many renewable energy applications including solar

    water heat, solar photovoltaic, and wind, providing for

    an exemption from sales tax for the equipment and

    installation costs of systems of at least 200 kW. The

    exemption is scheduled to expire on June 30, 2009.9

    Minnesota offers a sales tax exemption for certain

    solar technologies including solar water heat andsolar photovoltaic as well as wind energy conversion

    systems.10

    Property Tax ExemptionsAccording to DSIRE, the majority of property tax

    incentives provide that the added value of a renewable

    energy system is excluded from the valuation of the

    property for taxation purposes.11 These exemptions often,

    but not always, apply to the commercial, industrial, and

    residential sectors. For example:

    New York State has a solar, wind, and biomass energy

    systems exemption offering a 15-year property tax

    exemption for many renewable energy applications. The

    exemption will expire on December 31, 2010. Certain

    local taxing authorities can disallow the exemption.12

    Illinois has a special property tax assessme

    energy systems. In Illinois solar energy eq

    is valued at no more than a conventional

    system.13

    Grants and RebatesGrants and rebates provide cash payments to

    a portion of the initial cost of a renewable en

    deployment. Grant programs may require app

    funds prior to the purchase of equipment. Ex

    such state programs include:

    Ohio disburses funds under the AdvancedProgram Grants for distributed energy and

    energy projects. Grants cover many forms

    energy with awards of up to $200,000 for

    systems under third-party ownership. Gran

    on system size as measured by energy pote

    never exceed 50% of project cost.14

    The California Solar Initiative initially off

    of up to $2.50 per watt for commercial ph

    systems of less than 50 kW15 based on theperformance of the system (Expected Perf

    Based Buydown or EPBB). The incentive r

    in 10 steps as a function of the total level

    photovoltaic power installed under the pro

    Please see Table 4 for more information.

    TABLE 4 . CAL IFORNIA SOLAR IN IT IAT IVE EPBB AND PBI AM OUNTS PER STEP

    EBPP PAYMENTS (PER WATT) PBI PAYMENTS (PER kWh)

    MW

    STEP STATEWIDE MW IN STEP RESIDENTIAL COMMERCIAL GOVT/NONPROFIT RESIDENTIAL COMMERCIAL G

    1 501 n/a n/a n/a n/a n/a

    2 70 $2.50 $2.50 $3.25 $0.39 $0.39

    3 100 $2.20 $2.20 $2.95 $0.34 $0.34

    4 130 $1.90 $1.90 $2.65 $0.26 $0.26

    5 160 $1.55 $1.55 $2.30 $0.22 $0.22

    6 190 $1.10 $1.10 $1.85 $0.15 $0.15

    7 215 $0 65 $0 65 $1 40 $0 09 $0 09

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    LoansSome states provide loans to promote deployment of

    renewable energy. Rates and tenors vary by program. In

    certain cases, states provide a below-market interest rate.

    For example:

    North Carolina has the Energy Improvement Loan

    Program that provides loans for certain types of

    renewable energy. Loan amounts may be up to

    $500,000 for a maximum 10-year term. The interestrate can be as low as 1% depending on the renewable

    technology, but a corporate borrower has to secure the

    loan with a bank letter of credit.17

    Iowa offers the Alternate Energy Revolving Loan

    Program, which provides 50% (maximum $1,000,000)

    of the total loan required for certain renewable energy

    investments at a 0% interest rate. The matching

    financing requirement must be borrowed from a bank

    on market terms. The combined loan, with only halfat market interest rates, offers a low-cost source of

    funding for deployment of certain renewable energy

    applications.18

    State Production Incentives

    The California Solar Initiative, des

    a production-based incentive (PBI)

    systems of 50 kW19 or larger. The

    per kilowatt hour for the first five yand began at $0.39/kWh for tax p

    incentive reduces in 10 steps as a f

    amount of solar photovoltaic powe

    program.20 See Table 4 for details a

    section for information on current

    New Jersey has created a set-aside u

    portfolio standards program requir

    2.12% of all electricity sold in the

    generated. Under the program, th

    Renewable Energy Certificates (SR

    the generation of one MWh of sol

    are issued to registered solar energy

    prices are essentially capped by the

    Compliance Payments (SACP) cha

    fail to meet their solar generating r

    given year. The price for New Jerse

    half of 2008 was approximately $2

    was $300. However, beginning in J

    Jersey Board of Public Utilities cha

    SACP is established and moved to

    schedule. The first schedule begin

    $711 reducing to $594 by 2016.21

    In Massachusetts, Connecticut, an

    Energy Consumers Alliance of Ne

    a three-year contract to purchase R

    photovoltaic and wind projects at MWh.22

    Notes1. Please note that this is not an exhaustive

    2. The amount of the credit is subject to retax exempt energy financing is used (see

    org/).

    3. Please refer to (http://www.dsireusa.org/

    on eligible system sizes and maximum in

    4. Production Tax Credit amounts are indeamounts above are for the 2007 tax year.

    5. Bonus depreciation was not extended pa

    6. DSIRE 2009a.

    7. DSIRE 2008c.

    8. DSIRE 2008m. In Texas the corporate fra state corporate tax and covers taxable c

    Public Service Electric and Gas (PSE&G) is committing approximately $105 millionto a 30 MW solar loan program with 12 MW reserved for commercial and industrialcustomers. Over the next two years, PSE&G will lend between 40-60%of the systemcost on a first lien basis to approved commercial and industrial customers. PSE&Gsloans can be repaid through SRECs generated by the installation or in cash. PSE&Gwill value the SRECs at the higher of $475 or market price. The loan amount is basedon the estimated output of the system and the $475 floor price over 15 years. If theloan is amortized faster than planned, due to higher SREC prices or greater systemoutput, PSE&G retains a call on the SRECS at 75% of market price through year 15.There has been significant interest in the program from commercial and industrial

    customers with some 10 MW of the total 12 MW program already committed.1 PSE&Gnotes that it is prepared, if the program is successful, to expand beyond the original30 MW pilot.2

    Notes

    1. Public Service Enterprise Group 2009.

    2. Public Service Electricity and Gas, Frederick A. Lynk, Manager, Market Strategy and Planning,personal communication, July 2, 2008.

    BOX 9 . NEW JERSEY UT IL ITY OFFERS INNOVAT IVE LOAN PROGRAM

    BASED ON SOLAR RECS (SRECS)

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    15. Reduces to 30 kW in 2010. See California Solar InitiativeHandbook (CPUC 2008a).

    16. DSIRE 2008a. For current incentive levels, please refer to theStatewide Trigger Point Tracker (http://www.csi-trigger.com/).

    However, please note the final incentive rate will be determined

    by the CSI Program Administrator.

    17. DSIRE 2008k.

    18. DSIRE 2008e.

    19. Reduces to 30 kW in 2010. See California Solar InitiativeHandbook (CPUC 2008a).

    20. DSIRE 2008a.

    21. DSIRE 2008i.

    22. DSIRE 2008f.

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    SECT

    IO

    N

    V

    Options for DeployingOn-Site Renewable Ener

    There are many options for deploying renewable energy at

    business locations. Some entail direct ownership, wherein

    a company owns the power produced at its site. Others

    are based on third-party ownership, wherein the site host

    does not own the power produced on-site. In many cases,

    a company will use the energy produced at its site, even

    under third-party ownership models, by purchasing theenergy under a power purchase agreement. In other cases,

    a company is not interested in using the energy produced

    on-site, but it is willing to rent space to a third party who

    generates and sells the power.

    Table 5 shows the general options available for deploying

    TABLE 5 . OPT IONS FOR DEPLOYING

    RENEWABLE ENERGY

    DIRECT OWNERSHIP

    OF POWER

    THI

    Use of

    Power

    Company invests in

    an on-site renewableenergy project andconsumes the power.

    Investor

    at a compurchascontract

    No PowerUse

    Company invests inan on-site renewableenergy project and sellsall or most of the power

    Investor at a comfor leaseconsider

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    is similar to any other capital expenditure project, there

    are several unique elements. These include accounting for

    federal and state incentives and considering avoided cost,

    carbon value, dispatch profile, and net metering:

    Avoided Cost: If a firm uses 100% of the energy

    from its on-site renewable deployment, there is no

    incremental revenue from the project. Instead, cashflow is increased by the avoided cost of purchased

    energy. Therefore, it is critical to estimate the future

    avoided cost of energy correctly when considering on-

    site renewable energy investments.

    Carbon Value: One of the factors that may have a

    significant impact on future energy costs is the cost

    of carbon dioxide emissions in a carbon-constrained

    economy. WRI has developed an analytical tool

    to allow modeling of assumed carbon costs when

    estimating project cash flows for energy efficiency and

    renewable energy investments. The Carbon Value

    Analysis Tool (CVAT) is available on WRIs website at

    http://docs.wri.org/CVAT_v1.3.xls.

    Di h P fil U d di h di h fil

    a good peak shaving profile can reduce dem

    purchased electricity when it is at its highes

    However, many on-site renewable deployme

    electricity generation (wind and solar photo

    generation profiles that do not perfectly co

    the sites requirements. For example, the si

    generate more electricity than it needs in ce

    or during certain parts of the day. At other

    site may require more electricity than is ava

    the renewable energy source and need to pu

    grid-supplied electricity. When sites generat

    electricity, it is critical to understand the ne

    regulations applicable to the project (see be

    Net Metering: This entails measuring the

    of electricity from a grid-connected site wi

    generating capacity. When the site generatelectricity than it needs, the excess is fed in

    and the electric meter runs backward, ther

    energy purchases during other periods. Th

    allows the net-metered site to offset future

    purchases at retail prices. Through net me

    l i i d i i d

    Estimating all of the cash flows associated with a project overits full life including costs (negative cash flow) and revenue orcost savings (positive cash flow). This information is sufficient todetermine the simple cash payback, which measures how long ittakes for the project to cover its initial costs.

    Identifying the firms weighted average cost of capital or other hurdlerate since many firms consider the time value of money in the capitalbudgeting process and do not rely only on the simple payback.

    Determining either (1) the net present value (NPV) of the project

    cash flows based on the firms hurdle rate or the weighted averagecost of capital, which may be adjusted for the relative risk of theproject, or (2) the internal rate of return (IRR) of the cash flows.

    Analyzing the results where (1) a positive NPV, or (2) an IRR greaterthan the hurdle rate indicate an acceptable investment based onthe estimated cash flow profile.1

    Note

    1. In theory all projects with positive NPV or IRR outcomes should beaccepted, but since capital is constrained, many firms undertake a forced

    ranking of projects.

    BOX 10 . BASIC ELEM ENTS OF THE CAPITAL BUDGET ING

    PROCESS

    The Carbon Value Analysis Tool (CVAT) is a screening tocompanies integrate the value of carbon dioxide emissinto energy-related investment decisions. The tool has purposes:

    To test the sensitivity of a projects internal rate of rto carbon value (the value of GHG emissions reducintegrates this value into traditional financial analya market price, either actual or projected, to carbonreductions.

    To facilitate the development of emissions reductionby developing a Marginal Abatement Cost Curve (MAportfolio of projects. CVAT ranks projects so managethem according to their implicit cost per tonne of careduction.

    CVAT estimates direct and indirect emissions reductionstandards developed by the GHG Protocol Initiative. CVAa Monte Carlo analysis for key project variables such aproviding insights into the possible range of a projects

    Source: World Resources Institute.

    BOX 11 . THE CARBON VALUE ANALYSIS TOO

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    period. In addition, numerous states only provide net

    metering for certain utility types. To correctly estimate

    project cash flows from renewable energy projects, it is

    important to understand whether, and on what terms,

    net metering is available in a given location.

    Once a company has made the decision to pursuea renewable energy project as a direct owner, the next

    question is how to finance the project. Numerous options

    are available ranging from internally-generated cash

    flow to energy savings performance contracts. A brief

    discussion of five financing alternatives follows:

    Internally Generated Cash or

    Corporate FinancingWhen direct ownership of an on-site

    project is preferred, most large, invest

    corporations would normally finance

    internally generated cash flow or cashthrough general corporate capital mar

    Internally generated cash is what a co

    from its operations and is defined as

    depreciation and amortization. It is av

    debt service payments, paying dividen

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    process. Management may be uncomfortable with

    renewable energy technology or may not see such projects

    as strategic investments. Alternatively, projects may suffer

    from perceptions of low returns if the managers evaluatingthem do not use a shadow price for carbon or integrate

    the value of incentives into their calculations.

    Secured LendingSmaller or non-investment-grade companies may not

    have sufficient internally generated cash flow or the debt

    capacity to borrow easily for general corporate purposes.

    Such companies often turn to banks and borrow on a

    secured basis. They secure loans by offering collateral

    such as inventory and receivables or property, plant, and

    equipment. Pledging collateral may help such companies

    obtain bank loans when they would not normally qualifyfor unsecured loans.

    The collateral is used to reduce a banks loss in the event

    of a default on the loan. When making a secured loan,

    banks evaluate both the quality of the borrower and the

    collateral. Quality of collateral is judged by (1) the value

    of the asset being pledged and the consistency of that

    value over time, as well as (2) the ease with which it can be

    liquidated including the cost to reposition the asset and

    general market demand for the asset category. Once bankscomplete collateral valuation, they apply the advance rates

    they are willing to lend against pledged assets. Advance

    rates generally range from 50 to 80% depending on the

    asset class taken as security.

    Given the relative newness of renewable energy products,

    l t d h d f t ti th ll t l

    Vendor FinancingIn order to support their marketing efforts, m

    equipment manufacturers have established ei

    or third-party vendor financing relationshipsfinancing helps the manufacturer sell its prod

    facilitating financing of a customers purchas

    financing is done by a third party, that party

    done the work necessary to become comforta

    technical aspects of the product as well as its

    value. For companies requiring dedicated fina

    an on-site renewable energy project, the availa

    terms of vendor financing can be one criterio

    evaluating proposals made by different vendo

    LeasingAnother financing technique that may be ava

    renewable energy deployment is leasing. Und

    arrangements, the investor or lessor usually r

    ownership of the equipment, which is made a

    to the lessee for a stream of rental payments.

    lessees standpoint, there are essentially two m

    leases:

    Capital Lease: Under a capital lease a lesse

    to show the leased equipment as an asset a

    present value of lease payments as debt on

    sheet. The accounting standards for lease

    (FAS 13) require any lease meeting at least

    of the following criteria to be classified as

    lease:3

    (a) the lessor transfers ownership to the leend of the lease term;

    (b) the lease contains an option to purcha

    a bargain price;

    (c) the lease term is equal to 75 percent or

    estimated economic life of the property

    for used property leased toward the end

    life) or

    (d) the present value of minimum lease renis equal to 90 percent or more of the fa

    value of the leased asset.4

    Operating Lease: Operating leases are not

    on a companys balance sheet and lease pa

    treated as an expense for accounting purp

    Johnson & Johnson has committed to reduce its GHG emissions to7% below 1990 levels by 2010. Since GHG reduction efforts such as

    energy efficiency and renewable energy projects had encountereddifficulty competing for funds in the companys capital budgetingprocess, the company established a dedicated capital expenditureprogram. Johnson & Johnson will allocate up to $40 million annuallyfor GHG reduction projects, and will evaluate them based on criteriaspecific to the fund, including the level of expected GHG reductions.

    Source: Climate Northeast 2008.

    BOX 12 . JOHNSON & JOHNSONS CAPITAL IDEA

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    accounting and to determine the appropriate accounting

    treatment for the transaction under consideration.

    The Equipment Leasing and Finance Foundations

    (ELFF) 2007 study, The Future of Financing Alternative

    Energy Equipment,indicates that lessors and equipment

    financing companies are actively engaged in pursuing

    opportunities in the alternative energy sector.6 The

    study included a survey with responses from 33 firms

    involved in the equipment leasing and finance industry.

    Table 6 was derived from ELFFs report. It provides some

    interesting insights into current activities and potential

    future trends.

    Energy Services Company with Energy

    Savings Performance ContractEnergy Service Companies (ESCOs) have existed forsome 25 years, with the birth of the industry dating to the

    spike in energy prices experienced in the late 1970s and

    early 1980s.7 The National Association of Energy Services

    Companies defines an ESCO as a business that develops,

    installs, and arranges financing for projects designed to

    improve the energy efficiency and maintenance costs for

    facilities over a seven to twenty year time period.8 Such

    projects can include energy efficiency equipment as wellas renewable energy installations. When renewable energy

    is deployed as part of a larger energy efficiency package,

    it is typically included in the energy savings performance

    contract (ESPC, see below). However, when the renewable

    energy equipment is the main component of the ESCO

    d l d d

    ways, including cash generated intern

    secured lending, or leasing.

    In the United States, when renewab

    of a larger energy efficiency project, E

    ESPCs. Under an ESPC, ESCOs gua

    level of energy cost savings from the p

    Financing for an ESCO project is also

    energy savings so that the customer se

    the energy cost savings generated by t

    When renewable energy equipment

    an ESPC, the site host benefits from

    savings that may exist, and (2) a hedge

    future energy cost increases. Dispatch

    assumed by the ESCO under the ESP

    availability and efficiency. From the s

    the hedge value of an ESPC is maxim

    performance shortfalls are guaranteed

    on kWh of electricity at prevailing ele

    Section VI for more information on d

    According to a recently completed

    ESCOs generate most (nearly 75%) o

    energy efficiency, but on-site generatio

    segment of the business and accounte

    industry revenues in 2006.10 The surv

    that ESCOs are heavily weighted to th

    but that the private sector represented

    2006 ESCO revenue. One of the fact

    work with federal government facilitie

    13123, Greening the Government Throug

    Management (1999) which among oth

    TABLE 6 . PART IAL RESULTS FROM THE FUTURE OF FINANCING ALTERNATIVE ENERGY EQUIPMENT

    Is your company actively engaged in alternative energy? 39%: Yes 61%: No

    If currently not invested in alternative energy, do you plan to begin? 27%: Yes 73%: No

    If currently invested in alternative energy, do you plan to continue? 71%: Yes 29%: No

    What is the size of your investment in alternative energy? 80%: < $10million

    0%: $10 to 49.9million

    12%: $50 to million

    What is the size of your alternative energy transactions? 40%: < $1 million 30%: $1 to $25million

    30%: > $25million

    Which technologies are you involved with? 20%: Wind 20%: Solar 22%: Biofuel

    Note

    1. Other includes electricity generation from bio/agricultural waste (20%), hydroelectric (7%), or geothermal (12%).

    Source: Derived from Alta Group and Metcalf 2007.

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    could not deploy renewable energy technology under

    ESPCs more frequently. As concerns about energy costs

    and the potential impact of a carbon-constrained economy

    grow, the ESPC model is an option for companies to

    achieve not only energy efficiency savings, but renewable

    energy deployment as well.

    THIRD-PARTY OWNERSHIP (USE OF POWER)

    There are many reasons why a company may not want

    to invest its capital in a renewable energy project but

    would like to benefit from the use of renewable energyinvestments on-site. The market has responded with two

    interesting options. The first is the Solar Power Purchase

    Agreement model and the second is the Energy Services

    Company model.

    Solar Power Purchase Agreements (Solar PPA)The Solar PPA deployment option allows companies to

    use their rooftops or other sites to host solar photovoltaic

    systems and to benefit from the power they generate withlittle to no capital commitment. Under this model, a

    third party owns the solar photvoltaic system and the site

    host enters into a long-term power purchase a

    with the third-party owner. The contract is us

    minimum of 10 years and typically at a price

    to or slightly lower than the utility retail priceparty project developer typically handles all a

    project development including site assessmen

    configuration, procurement, installation, and

    The project developer is also typically respon

    system operations and maintenance (O&M).

    Investors provide the financing needed for

    installation and benefit from applicable feder

    state incentives as well as the revenue received

    power purchase agreement. However, it shouthat to make the third-party, solar PV owner

    work, specific solar provisions such as federal

    solar investment subsidies, and solar-specific

    requirements have proven to be important.1

    the electric power commercially competitive,

    these projects are effectively sharing some of

    and state incentives with the host. In this way

    that does not have an appetite for tax incenti

    benefit from them indirectly.A Solar PPA deployment generally entails tw

    (1) a site license or lease, and (2) a power pur

    agreement. The site lease grants the solar serv

    access to the site for installation and mainten

    power purchase agreement typically establishe

    at which power is purchased, (2) the term of t

    and any purchase options or termination pro

    performance standards and default remedies,

    ownership of RECs generated by the installatTerms vary significantly between contracts,

    to include the following key provisions:

    Victorville Prison benefited from the first wind turbine installed underan energy savings performance contract. The 750 kW wind turbinewas installed at the prison as part of an energy efficiency project. Theproject was expected to generate $420,000 in annual energy savings.

    Source: Belyeu 2004.

    BOX 13 . WIND TURBINE BOOSTS ENERGY SAVINGS

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    Power Tariff: There are many permutations for setting

    the power tariff including (1) a fixed rate portion, (2) a

    fixed rate with an annual escalator set on a percentage

    or per kWh basis, or (3) a tariff indexed to publicutility rates. Note that even when an indexed tariff is

    set at a discount to public utility rates, it does not offer

    a hedge against possible future energy price increases

    since the tariff is indexed to such increases. However,

    contracting for long-term rates indexed at a discount to

    public utility rates should allow for cost savings relative

    to grid-supplied electricity.

    Tenor and Renewal: PPA tenors are normally for 10

    to 20 years14 with the length of the contract being afunction of (1) the site owners objective in terms of

    energy hedging, (2) PPA tariffs, and (3) the tenor of the

    site beneficiarys leasehold if it does not own the site

    outright. PPA contracts may contain renewal options

    allowing the site owner to extend the contract terms

    for additional period(s) or allow for a purchase of

    the system by the site owner at fair market value. Site

    owners should seek competent accounting advice when

    negotiating renewal and purchase options as thesecontract terms may affect the accounting treatment of

    the underlying agreement.

    Ownership of RECs: If the site host wants to control

    the RECs from the installation, it will typically need

    to purchase them from the project owner. In this way

    the site owner purchases the energy and the claim of

    renewable energy generation under a PPA. The site

    host will need to evaluate the incremental cost for theRECs relative to current market conditions as well as

    its expectations for future REC prices.

    To date, the Solar PPA model in the United States has

    essentially been limited to solar photovoltaic systems.

    However, here are two examples of a similar approach

    used with other renewable technologies.

    The municipal utility in Lakeland, FL has installed

    solar water heaters for some 60 residential customers

    on a pay for energy basis. Lakeland Electric owns and

    maintains the solar water heaters and bills customers

    only for the electricity equivalent of hot water used.

    When the units were installed approximately 10 years

    ago, customers benefited by getting a fixed solar energy

    rate This solar energy rate is now significantly below

    lease payments serve to offset Nike

    green power from wind source at t

    Energy Services Company MoPurchase AgreementAs noted, when an ESCO deploys ren

    the main component of a project, it i

    PPA. The above comments on Solar P

    to ESCO PPAs as well. One of the ke

    an ESCO and a Solar PPA company i

    does not have a pre-determined techn

    and will often explore several possibil

    energy efficiency measures, before gen

    recommendation.

    DIRECT OWNERSHIP (NO PO

    Another approach to deploying renew

    to own the asset but to sell the power

    Under this deployment model, the ob

    simply to reduce or hedge the cost of

    to generate a return by monetizing on

    resources for sale to third parties. How

    not already in the energy business hav

    investments to date under this model

    Lack of Investment in Direct

    Power Use)There are numerous reasons for the l

    on-site generation for third-party sale site demand, poor site quality, exclusi

    incentives, net metering regulations, a

    management comfort with this mode

    On-Site Demand: Many business l

    significant power needs and deploy

    to help meet a portion of those ne

    companies, excess generation capa

    Site Quality: Most business locatiofor reasons other than the quality

    resources. As such, the best locatio

    renewable energy installation may

    companys manufacturing plant, d

    retail outlet is located.

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    Net Metering Regulations: Many net metering

    regulations provide disincentives for excess generationby either (1) granting net excess generation to a utility

    after a 12-month billing cycle, or (2) compensating

    net excess at lower rates such as avoided cost. Table 7

    provides information on the treatment of net excess

    generation for selected states.

    Lack of Familiarity and Comfort: Companies may

    be unfamiliar with renewable energy alternatives and

    believe that they lack the management and technical

    capacity to operate a renewable energy system as arevenue-producing asset.

    Feed-in Tariffs May Promote Direct

    Ownership (No Power Use)F d ff (FIT) d bl f l d d

    contract term for all qualifying renewable ene

    They have been implemented in over 40 cou

    worldwide and have resulted in major market

    renewables in both Germany and Spain.19

    In 2008, California provided for feed-in tar

    all customer-generators of Pacific Gas and Ele

    and Southern California Edison for up to 22

    renewable generating capacity.20 To qualify fo

    tariff, the facility must be powered by an eligi

    energy resource (including wind and solar) an

    electric generating capacity of no greater than

    Such facilities can choose contracts of 10, 15

    and are paid based on the market-price referadjusted for time of use factors so that peak p

    be higher than at other times. Customer-gene

    sell all of their output under the full buy/se

    choose to use a portion of the electricity for t

    and sell the remainder under the excess sale

    Since the incentive is designed to help publ

    meet their RPS requirements, RECs are trans

    utility for the amount of electricity sold unde

    tariff. Customer-generators retain the RECs cto electricity used on-site. The feed-in tariff p

    only available to facilities that are not particip

    net metering and have not benefited from ce

    incentives, such as the California Solar Initia

    By offering standard contract terms includi

    guaranteed pricing mechanisms, it will be eas

    customer-generators to sell excess generating

    developed on-site. In addition to providing tr

    in terms of electricity pricing, standard contrreduce transaction costs.21

    To date, only California has enacted FIT le

    state-wide basis, but there appears to be incre

    in this policy alternative. In mid-2008, for ins

    one study found that six states have introdu

    in tariff bills, and another eight states have co

    or are considering, similar legislation.22 It is

    to understand, however, that while the Califo

    is based on time of delivery, several other statconsidering legislation more closely resemblin

    German approach.23 Under the German fee

    legislation, renewable energy technologies are

    interconnection with the electricity grid, and

    premium rate that is designed to generate a r

    TABLE 7 . TREATM ENT OF NET EXCESS ELECTRICITY

    GENERAT ION FOR SELECTED STATES

    STATE1 TREATMENT OF NET EXCESS GENERATION (NEG)

    CaliforniaGeorgiaIllinoisMichigan

    Credited to customers next billGranted to utility at end of 12-month billing cycle

    FloridaNew Jersey2

    New York3

    Credited to customers next billPurchased by utility at avoided-cost rate at end of12-month billing cycle

    Ohio Credited at ut ilit ys unbundled generation rate to

    customers next billCustomer may request refund of NEG credits accumulatedover a 12-month period

    Pennsylvania Credited to customers next bill at utilitys retail ratePUC to address treatment of NEG remaining at end of12-month period

    Texas Purchased by utility for a given billing period at avoided-cost rate

    Notes

    1. Please note that each net metering program indicated may have numerousspecificities including limitations on overall enrollment and system size aswell as which utilities are involved.

    2. Customer generators actually have several options for compensation of NEGin New Jersey.

    3. Annual NEG for non-residential systems needs to be addressed by theutilities and DPS.

    Source: Derived from DSIRE (various pages).

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    generators would have been able to enter into 20-year

    power sale agreements. Uniform national Renewable

    Energy Payment (REP) rates would be set by FERC at

    levels that would provide a 10% internal rate of return forrenewable energy facilities installed under good resource

    conditions (defined as the top 30% percentile).25 This bill

    will likely be re-introduced (in a slightly revised form) in

    2009.

    Financing Options for Direct Ownership (NoPower Use)If companies become interested in owning on-site

    renewable energy in order to generate revenue, eitherbecause of a growth in feed-in tariffs or some other reason,

    then the financing mechanisms discussed for Direct

    Ownership (Use of Power) will generally apply. If the

    avoided cost of power is no longer the rationale for the

    investment, however, firms should consider several points:

    The capital budgeting process will be based on the

    expected sales price of the power and not the avoided

    cost of purchased power. Lenders will focus on (1) the strength of the contractual

    relationship underlying the feed-in tariff or other

    power sale agreement, and (2) the credit quality of the

    purchaser under any such power sale agreement, among

    other issues.

    THIRD-PARTY OWNERSHIP (

    The final deployment model consists

    space for a third party to generate pow

    sold through the grid. This enables a c

    unused or under-used asset economic

    generates a return for the site owner. T

    used to develop wind projects on agri

    For farm owners, wind can be an unu

    leasing sites to a wind project develope

    a return to the farmer without disrupt

    Other businesses can also use this m

    incremental revenue on under-utilizedcandidates typically have a good renew

    or solar) and are located near transmi

    it is often the case that on-site consum

    use of on-site generation, the most de

    Third-Party Ownership (No Power Us

    the available energy resource significa

    energy demand. This is the case with

    can also be true for warehouses and d

    Such facilities typically have large flat certain geographic regions, can suppo

    systems that exceed their own energy

    brownfield sites may also be located in

    renewable resources and often already

    connections near load centers.

    TABLE 1 . ON-SITE RENEWABLE ENERGY DEPLOYM ENT AND FINANCING OPT IONS

    DIRECT OWNERSHIP OF POWER THIRD-PARTY OWNERSH

    Use of Power Company invests in an on-site renewable energy project andconsumes the power

    Investor installs renewable assets atcompany purchases power under lon

    Financing Options General corporate financing or dedicated financing:Secured lendingLeasing1

    Vendor financingESCO2 with Energy Savings Performance Contract

    Solar Power Purchase Agreement (PPESCO with Power Purchase Agreemen

    No Power Use Company invests in an on-site renewable energy project andsells all or most of the power

    Investor installs renewable assets atexchange for lease payments or othethe power to another entity

    Financing Options Similar to Direct Ownership (Use of Power) Hosting arrangement in exchange foconsideration

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    Examples of this deployment model, using wind and

    solar energy, include:

    Southern California Edison (SCE): SCE announced

    in March 2008 that it was embarking on a program toinstall 250 MW of solar photovoltaic generation systems

    on commercial rooftops in California. The systems

    will generate sufficient power for some 162,000 homes

    and convert approximately two square miles of unused

    commercial rooftop space to productive use. SCE will

    benefit from a peak-generating renewable energy source

    that does not require building extensive transmission

    infrastructure. Since the commercial rooftops are

    located in urban areas, the solar installations can beconnected to nearby neighborhood circuits.26

    Steel Winds: 20 MW of wind power have been

    developed on a brownfield that was formerly a

    Bethlehem Steel Mill on the shores of Lake Erie. The

    wind farm will produce sufficient electricity to power

    6,000 homes and did not require the construction of

    new roads or transmission lines since it could use those

    left over from the steel mill.27 Because of the good wind

    profile, the developers had an excellent site on which

    to construct a wind farm. In addition, the wind farm

    provides a lease payment to the site owner.28

    Before deciding on a deployment option, it is important

    to understand that each alternative has different features

    and benefits and entails different trade-offs in terms of

    risks. To make the best deployment decision, a company

    must define its objectives and examine the features and

    benefits inherent in each deployment option.

    Notes1. EOS Ventures 2008.

    2. Ross, Westerfield, and Jaffe 2006, p 376.

    3. Financial Accounting Standards Board 1976.4. Equipment Leasing and Finance Association 200

    5. Financial Accounting Standards Board 2006.

    6. Alta Group and Metcalf 2007.

    7. National Association of Energy Service Compani

    8. Ibid.

    9. Ibid.

    10. Hopper et al. 2007. The survey shows 10% of indfrom renewable energy but specifies that some res

    included greening buildings in the renewable c

    activity in renewable generation may be somewha11. President 1999. Energy consumption measured bconsumption per square foot. Different standards

    federal industrial and laboratory facilities.

    12. Cory et al. 2008.

    13. Ibid.

    14. Merry 2008.

    15. DSIRE 2008b.

    16. GPMDG-EU 2007.

    17. Fox 2008.

    18. REN21 2007.19. Ibid.

    20. CPUC 2008b. Renewable generation from water treatment facilities is covered under a separate lim

    21. Fox 2008.

    22. Rickerson, Bennhold, and Bradbury 2008.

    23. Ibid.

    24. Ibid.

    25. Gipe 2008.

    26. Edison International 2008.

    27. BQ Energy 2006.28. Krouse 2007.

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    SECT

    IO

    N

    V

    I

    Objectives and Risks in On-Renewable Energy Deploym

    This section looks at how to define objectives and

    assess risks associated with an on-site renewable energy

    deployment. It considers ten factors, including:

    Objectives

    Energy Costs

    Energy Cost Hedge

    Energy Reliability

    Brand Enhancement

    Using Tax Appetite

    Risks

    OBJECTIVES FOR AN ON-SITEENERGY DEPLOYMENT

    For many companies, the reasons to c

    renewables include achieving the ben

    in this paper as well as realizing tax be

    revisits the benefits of renewable enerthere are trade-offs to be made when

    technology and deployment model.

    Energy Costs and Energy CosOne potential benefit of a renewable

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    be appropriate, since the deployment would not affect

    energy costs.

    There are important distinctions, however, between

    direct ownership and third-party ownership even when thesite owner is using the power generated by a project. Under

    direct ownership, the site owner controls the power for the

    entire economic life of the installation, which may be up

    to 30 years or more for certain technologies. Under Third-

    Party Ownership (Use of Power) options, however, the site

    owner only controls the energy through a power purchase

    agreement, which differs from direct ownership in that

    power purchase agreements:

    Typically do not run for the entire economic life of theproject, although they may contain a fair market value

    purchase option at the end of the contract.

    Offer various pricing options such as (1) a fixed rate

    with an escalator, or (2) a rate indexed to utility rates in

    some fashion.

    This means that a site owner needs to decide whether

    hedging future energy cost is critical to its business when

    negotiating the terms of a power purchase agreement.For example, a power rate indexed to utility rates does

    not offer a hedge against rising energy costs. A fixed rate

    with an escalation factor may offer a better hedge. A short

    tenor (10 years) would only provide an energy cost hedge

    for the duration of the contract, depending on the nature

    of any renewal provision.

    Energy Reliability

    Another benefit of an on-site renewable energydeployment can be improved energy reliability. Similar

    to the discussion regarding energy cost, energy reliability

    is only enhanced to the extent the site owner is using the

    energy produced; the benefits do not apply under No

    Power Use options.1 There are other issues to understand

    as well. For instance:

    Wind and solar technologies can improve reliability

    if energy storage equipment is included in the system,

    but they are intermittent power sources. The site owner

    would be limited to the power stored in batteries and

    generated from intermittent sources until grid power

    was re-established.

    Geothermal heat pumps actually require electricity to

    Brand EnhancementNot all of the options for deploying renewabl

    offer the same potential for brand enhancem

    noted, there are two different ways in which renergy deployment can improve a companys

    reducing the GHG emissions from the busin

    by providing a visible physical investment in g

    In order for a company to claim the use of r

    energy from an on-site system, it must retain

    energy certificates (RECs) associated with the

    the system. As such, under the Direct Owner

    of Power) option, the site owner would not b

    the RECs generated by the project if it wantethe use of green power. Under the Third-Part

    (Use of Power) deployment option, the contr

    is a negotiated point between the developer, i

    site host. To claim the use of green power, th

    would have to purchase both power and REC

    power purchase agreement. Conversely, Direc

    (No Power Use) may provide the site owner w

    option to retain RECs. Note, however, that u

    California feed-in tariff, RECS are transferredutility off-taker. When the Third-Party Owne

    Power Use) model is used, a company cannot

    green power.

    Even when there is no claim of using green

    site deployment means that the company still

    renewable assets at its location. If these assets

    visible to stakeholdersincluding customers,

    and investorsthey may generate a positive co

    The most visible asset is typically a wind turbcan be seen from a distance. Solar photovolta

    even solar thermal water heating units can be

    those visiting the site. Conversely, it is much

    for stakeholders to discern the existence of a

    heat pump.

    Tax Appetite

    To benefit directly from many of the federal aincentives supporting renewable energy deplo

    the site owner must have a tax appetite. Th

    means that it must be a taxable entity, althou

    special programs such as CREBS2 and REPI3

    non-taxable entities. However, even taxable e

    b i i i h b fi

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    The production tax cred